Grocers see competitive prices as key to tough economy

MADRID (MarketWatch) -- For European grocers, the continued tough economy means keeping prices competitive to get customers in the door, and that was the message from U.K.-based William Morrison Supermarkets and Belgian-based Delhaize on Thursday.

The U.K. operator of lower-priced grocery chains said it increased discounts on food items and offered holiday foods and alcohol towards the end of the year at half price, which helped boost 2009 results.

The group said while it was pleased with 2009 results, it expects the economic environment will remain challenging, with disposable incomes under pressure and "value to remain a high priority for customers."

Ian Gibson, non-executive chairman of the company, said the high quality, fresh food at "great value prices" will continue to lure customers from competitors and drive market share growth in the year ahead.

The company said it has an advantage in that it can offer deeper discounts on fresher products, supported by its own preparation facilities.

William Morrison also attributed 2009 results to investment in new space, saying 45 new stores were opened last year, two of which were replacements for existing stores.

Meanwhile, across the Channel, Belgium's Delhaize Group (DELB) saw its results get hit by a price war in the U.S.

Delhaize said U.S. comparable sales fell 2.8% as price competition between retailers heated up. It said U.S. retail food prices dropped 2.1% during the quarter against a 6.5% rise a year earlier.

The group, which operates the Food Lion, Hannaford and Sweet Bay chains in the U.S., reported an overall 10% fall in fourth-quarter net profit to 134 million euros ($182 million) as revenue fell 10% to 4.87 billion euros.

The net result was still ahead of the consensus forecast of 125 million euros and adjusted operating profit rose 4.6%, beating the company's 1% to 4% target range.

In Belgium, revenue rose 7.8% on the quarter, while in Greece it rose 7.8%.

The group said year-earlier results looked better owing to an extra week in the quarter.

But it also appeared ready for battle on the price front. "All of our operating companies have started to fine-tune their pricing strategies to achieve local value leadership, and we are gearing up for many other projects, including achieving EUR 300 million of annual operating cost savings by 2012," said Pierre-Oliver Beckers, president and chief executive officer. "We are ready for the challenges of 2010."

Delhaize said it expects 2010 operating profit to grow by between 7% and 10% and also said it would increase its net dividend by 8.1% to 1.2 euros a share.

Kurt de Baenst, analyst at Fortis Bank, said the results were better than expected, noting Delhaize has improved its volume trends and delivered on its goal to generate 100 million euros in cost savings and 50 million euros in working capital improvements. He maintains a buy rating and said they plan to raise their estimates and price target now.

De Baenst noted that the gross margin was helped out by favorable mix changes, improved supplier conditions in Belgium and Greece and better inventory control. But that margin also got hit by continued price investments and promotions in the U.S.

"We believe that Delhaize is striking the right balance between long-term growth and short-term challenges to sustain growth for the group," he said. "Therefore, we recommend to buy this value-stock now before food inflation and U.S. sales momentum recover!"

Shares of Delhaize were last trading up 0.7% to 60.09 euros in Brussels. Shares of William Morrison were down 1.4% on the London Stock Exchange to 300 pence.

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